According to KMPG / SPSL Retail Think Tank's (RTT) new barometer - the Retail Health Index (RHI) - the overall state of health in the retail sector has slipped to 95 index points in the second quarter to June 31. The base period for the RHI is the first quarter of 2006, when the index value was 100 points.
The drop represents the greatest single drop in any quarter since April 2006, with all key drivers - demand, margin and costs - contributing negatively to the health of the sector for the third quarter in a row.
RTT predicts that the state of health of the retail sector will continue to deteriorate in the next quarter, dropping to an RHI value of 91, with a fall in demand, rather than in margins or costs, to blame.
RTT added that the size of the non-food market will contract further in the next quarter, with fears of unemployment a big impact on consumer confidence.
Inflation is expected to continue to rise at a faster rate than retailers can pass on to consumers, while deflation across the non-food sector is now at an end, according to RTT.
KPMG's Helen Dickinson of KPMG said: "Quarter two saw increased negative impact of demand, margins and costs; all of which are expected to worsen in quarter three. The choices of retailers as to how they meet these challenges are beginning to seriously narrow and we cannot currently see any light at the end of the tunnel."